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Lawmakers consider market-based program to tackle greenhouse gases

First there was a primer on what cap and trade means. Duke Bascom owns a private investment firm specializing in renewable energy. He told committee members, in cap and trade the government sets an overall limit on greenhouse gas emissions from several sectors of the economy, including utilities, suppliers of heating fuel and gasoline, and large industry. The government then issues allowances, which individual companies can trade among themselves.

"So what government is doing is establishing the standard, and what the market is doing is finding the lowest cost solutions. Through trading, participants with lower costs of compliance costs are low can buy additional allowances and sell them to participants whose costs are higher," explained Bascom.

Bascom says the market would work best if it's kept simple and transparent. That means companies can't go outside the market and find projects in other sectors, or in other regions to compensate for their emissions -- that's called offsets. And it means the cap is firm. No hedging.

"Offsets, safety valves, and anything which changes the economics, changes the supply and demand of the cap and trade system, will diminish the value," Bascom said.

He endorsed the bill, because it wouldn't allow offsets, and it would require businesses participating in the market to buy all their allowances, rather than being given them by the state.

Governor Tim Pawlenty's task force on climate change endorsed the cap and trade concept, but it was unable to agree on details.

Edward Garvey is the governor's point person on climate change. He's negotiating with other Midwestern states to set up a regional cap and trade program. Garvey told the committee the bill's more stringent aspects would endanger those negotiations. Especially the requirement that 100 percent of the allowances to be purchased.

"The proposal for 100 percent, front end, all sectors may not be acceptable to other states. There may be other options that they want to pursue. If this is enacted into law, does that prohibit Minnesota from joining an alternative level? My concern is that it would," said Garvey.

But the bill's author, Rep. Kate Knuth, DFL-New Brighton, said Minnesota's high standards are already leading other states in the Midwestern compact.

"Minnesota set the floor in terms of our renewable electricity standard and our conservation and efficiency in the negotiations," said Knuth. "People saw what we were able to do here, and other states came on board, and I think that's something we should be really proud of in the state of Minnesota, and something I'm trying to achieve with this legislation as well."

Among others from industry who testified against the bill, John Rohlf from Medtronic said it's complicated to track emissions and to figure out what qualifies as a reduction. Rohlf said he was involved several years ago when the Chicago Climate Exchange started up, and here's the kind of questions that can come up:

"We just bought a company, do I have to count them? No, we sold the company, so do I get credit for selling them? We just out-sourced a bunch of stuff to China, so do I get credit for that, but actually it's dirtier, because now it's got to go back and forth a few times across the ocean. So suddenly it spirals into a very complicated tracking system. And what it really shows is that carbon is a global issue," Rohlf told the committee.

A parade of electric utility executives worried about how they'd have to raise their rates. They said they'd rather see a nation-wide market.

This was frustrating for Rep. Kathy Brynaert, DFL-Mankato. She said legislators want to influence the negotiations among the Midwestern states.

"We want to do something that we think is a meaningful challenge to the discussion, not by way of enacting an individual state system, but setting some parameters or principles so that we can engage that dialog aggressively and constructively, because we think that's what the circumstances require," Brynaert said.

But Bob Ambrose from Great River Energy responded that aggressive rules in Minnesota are less likely to bring other states along.

"Our view is that spending thousands of hours and probably hundreds of thousands or perhaps millions of dollars working on a regional plan is a distraction to what needs to be done at the national level," Ambrose said.

The committee took no action on the bill. The chairman promised more discussion soon.